A plan from the radical left to escape the cost-of-living crisis

Across the world, households are to varying degrees suffering from today’s cost-of-living crisis. As so often, the poorest and most vulnerable have been hit hardest. The current solution is for independent central banks to use monetary policy to bear down on inflation in the hope that once it comes down, higher rates of economic growth will resume, to the benefit of the majority. But is that really the case, and are there alternatives? A new book by Costas Lapavitsas, James Meadway and Doug Nicholls takes a radical leftist approach to the crisis and its resolution. The Cost of Living Crisis (and how to get out of it) is a pithy read, targeted at the general reader, and aims to debunk the mainstream explanations of the crisis while proposing policy solutions. It focuses more on the UK than elsewhere, but is applicable to other advanced countries.

Explaining the crisis

In short, the authors explain the persistence of the current inflationary crisis as a product of inadequate growth on the supply-side of the economy, particularly in the UK. Many of the largest firms have responded to government efforts to stimulate aggregate demand in the form of spending during the pandemic, alongside global supply shocks, by sharply raising prices. These increases have then spilled over into many other industrial sectors. The cost-of-living has risen rapidly, and continues to do so, while wages have failed to keep pace, meaning that real wages have fallen and profits have risen strongly though unevenly. The majority of the population, especially those on lower earnings, are dependent on income from wages rather than other sources, and are therefore suffering the most.

Joan Robinson’s ‘Economics: An Awkward Corner’ – still relevant today?

After a brief outline of one of Joan Robinson’s popular economics books, I ask whether the problems she identified in the economy and her approach to the subject remain relevant.

Joan Robinson was a pupil and colleague of John Maynard Keynes at Cambridge University and one of the inspirations for and founders of what became post-Keynesian economics. She has been described as one of the greatest economists of the twentieth century, in a profession which has generally been dominated by men. Despite making many contributions to economic thought, including the theories of imperfect competition and economic growth, she was never awarded the Nobel Prize, quite possibly due to her leftist radicalism which, unusually, became more pronounced with age. She was apparently something of a zealot and could be difficult to deal with, but her intellectual brilliance was not in doubt. She was also famous for saying that she had never learned mathematics, so she ‘had to think’.

Among many other academic publications, Robinson penned three more ‘popular’ books, including Economics: An Awkward Corner in 1966, which examined the problems facing the British economy at that time, and the implications for policy. Her summary plea was for the adoption of greater rationality in the organisation and management of the economy to ensure more sustainable, peaceful and widely-shared prosperity. Full employment had already been achieved, but she wanted to see rising living standards on a par with the rest of Western Europe, less inequality, the elimination of poverty and greater social justice.

Power, conflict and prices: thoughts on a year of high inflation

It has been a year of high inflation. Much of the world has seen double digit increases in prices, and the major central banks have raised interest rates sharply. There are signs, in the US and UK for example, that inflation may have peaked, with small declines in the annual rate in recent weeks. Governments there, and in the Eurozone, are relying on monetary policy to constrain demand and bring it down. Some leftist economists have objected that this remains a blunt and damaging instrument for tackling what has in the main resulted from supply-side shocks, which have taken the form of huge increases in the cost of food and energy. Particularly in the US, company profits have soared, albeit unevenly, while wages have lagged prices, generating the cost of living crisis. They have therefore called for price controls as a way of acting more directly on inflation. During the 1970s, when trade unions were generally much more powerful in many rich countries than they are today, they were more able to achieve substantial wage hikes to keep up with high rates of inflation. This time around real wages have been falling, making the majority poorer. In theory this should reduce the likelihood of a wage-price spiral and make it less likely that inflation becomes entrenched.

Quote of the week: Thatcher, monetarism and Marx’s reserve army

Following the last two weeks’ quotes from an interesting chapter by Fabio Petri, this is the third and final extract in this ‘mini’ series. It includes a revealing statement by a top Treasury civil servant under Margaret Thatcher in the 1980s, which saw a severe recession and the return of mass unemployment, topping three million by the middle of the decade, justified by the need bring down inflation.

The use of incomes policies involving negotiations between government, employers and trade unions to limit wage rises and mitigate the wage-price spiral of the time had largely broken down and the new government declared that the monetarist policies championed by Milton Friedman were the only way to do it. But the quote below reveals that Thatcher, rather than strongly adhering to monetarism, saw mass unemployment as an effective way of weakening the power of organised labour and its wage demands.

Inflation did come down, not just due to the renewed weakness of the working class, but also due to the sharp fall in the price of oil and other commodities on global markets, caused by recession across many of the world’s advanced economies. These developments came at great cost, and one must still wonder whether there could have been an alternative to the economic and social brutalities they engendered. Thatcher had declared not, an attitude exemplified by her famous TINA (There Is No Alternative) slogan. The reappearance of what Marx called the ‘reserve army’ of the unemployed, and the end of the post war policy commitment to full employment had been predicted by Michal Kalecki back in 1943.

“The 1970s witnessed the end of the Golden Age. Palma (sic) reports a declaration by Sir Alan Budd (a top civil servant at the British Treasury under Thatcher, and later Provost of Queen’s College, Oxford) on the real reasonings behind the Thatcher government’s use of neoclassical monetarist arguments to justify its brutal restrictive monetary policy:

The Thatcher government never believed for a moment that [monetarism] was the correct way to bring down inflation. They did however see that this would be a very good way to raise unemployment. And raising unemployment was an extremely desirable way of reducing the strength of the working classes…What was engineered – in Marxist terms – was a crisis of capitalism which re-created the reserve army of labour, and has allowed the capitalists to make high profits ever since.”

Fabio Petri (2023), Class struggle and hired prize-fighters, in J. Eatwell, P. Commendatore and N. Salvadori (eds.), Classical Economics, Keynes and Money, Abingdon: Routledge, p.58.

Avoiding a recession: the Fed conundrum

The Levy Economics Institute has published their annual Strategic Analysis paper on the current state of, and prospects for, the US economy, which is always an interesting read. The Institute is non-partisan, but much of its research and output takes its inspiration from two great post-Keynesian economists of the past: Hyman Minsky and Wynne Godley, who both emphasised the importance of aggregate demand to the state of the economy, in the short run and the long run, and the interaction of real and financial factors.

A summary of this short paper can be found here, and the pdf can be downloaded here.

As the paper notes, the US recovery from the pandemic-triggered recession has been swift, with GDP now above its pre-pandemic level, and the employment rate almost there, thanks in large part to the extraordinary scale of the fiscal stimulus enacted by the government. However, it has also been associated with a deteriorating current account deficit and a rise in inflation.

Inflation, the supply-demand debate and the policy response

As central banks around the world tighten monetary policy by raising interest rates in order to restrict demand, there remains an ongoing debate about whether this is the right response to the current inflation.

A large share of the inflation in many countries has been caused by supply shocks, as much of the world went through and then emerged from pandemic lockdowns, and as a consequence of the war in Ukraine. Taken together, these two have restricted the supply and thus increased the cost of food and energy on global markets. But there have also been impacts from the demand side, as many governments supported their economies with major fiscal stimuli during and after the lockdowns. The scale of these varied across countries, with the economic impact varying as a result. The US stimulus was particularly large and has helped restore its collapsed employment rate to the pre-pandemic level in recent weeks. However it is also arguable that this dramatic boost to demand has helped to fuel inflation. EU countries tended to be less ambitious fiscally, with the supply shocks contributing a greater share of the rise in inflation there than they have done in the US. The current inflation varies between countries, with Japan seeing a much smaller increase given its structurally weak demand and its historic struggles with deflation and weak growth in recent decades.

One of the big questions that has fuelled much debate in the media, not least on Twitter, is whether central banks need to be raising interest rates, which their own models say will only fully affect the rate of inflation a year or two down the line, when the global economy has begun to slow and forecasts of recession are becoming more frequent. If the very purpose of monetary tightening is to reduce demand in the form of investment and consumption and raise unemployment, which economists tend to think of as socially undesirable even if they may sometimes be intentional consequences of policy, the question arises as to whether such moves are necessary.

Joseph Stiglitz on what to do about the present inflation — via LARS P. SYLL

To be sure, some normalization of interest rates would be a good thing. Interest rates are supposed to reflect the scarcity of capital, and the “correct” price of capital obviously is not zero or negative – as near-zero interest rates and very negative real (inflation-adjusted) interest rates would seem to imply. But there are substantial […]

What to do about the present inflation — LARS P. SYLL

Robert Reich on big oil profits, inflation and imposing a windfall tax

The latest video from Robert Reich’s Inequality Media on the soaring profits of the big oil companies and how they should be taxed to ease the cost of living crisis in the US. As he notes, the UK government has recently enacted such a policy to help households with their energy bills, and may have to go further as the price of energy continues to rise.

What is really going on? — Real-World Economics Review Blog

by Yanis Varoufakis

. . . what is really going on? My answer: A half-century long power play, led by corporations, Wall Street, governments and central banks, has gone badly wrong. As a result, the West’s authorities now face an impossible choice: Push conglomerates and even states into cascading bankruptcies, or allow inflation to go unchecked. […]

What is really going on? — Real-World Economics Review Blog

A paradox of inflation: supply shocks can be caused by excess demand

Martin Wolf of the Financial Times made an important point with regard to the causes of inflation in last week’s economics commentary. His article drew on the latest Annual Report of the Bank for International Settlements. I will quote him in full:

“Explaining away what is happening as due to “exogenous” supply shocks is a big error. What is exogenous to any one economy is often endogenous to all of them. Thus, rapidly expanding demand in a number of significant economies will create a surge in global demand…excess demand will always show up first where prices are flexible, notably in commodities, before spreading.”

Thus today’s high inflation in many economies is not wholly the result of supply shocks due to pandemic-related supply-chain issues and war in Ukraine. It is also, in part, the result of excess global demand.